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INTERPRETATION  OF  THE 

INDEX  OF  GENERAL 

BUSINESS  CONDITIONS 


BY 

WARREN  M.  PERSONS 


/ 


HARVARD  ECONOMIC  SERVICE 

CAMBRIDGE,  MASS.,  U.S.A. 

1922 


INTERPRETATION  OF  THE  INDEX  OF  GENERAL 


BUSINESS  CONDITIONS 


WARREN  M.  PERSONS 


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I.    BUSINESS  CYCLES 

THE  ebb  and  flow  of  industrial  activity  and 
trade,  the  alternation  of  full  employment 
and  unemployment,  the  rise  and  fall  of  prices, 
wages,  profits,  and  interest  rates  are  familiar 
characteristics  of  our  economic  system.  This 
ebb  and  flow  of  economic  activity,  this  alterna- 
tion of  prosperity  and  depression  constitutes  the 
business  cycle. 

The  business  cycle  is  clearly  revealed  over  a 
period  of  years  by  the  wave-like  variations  in  the 
industrial,  commercial,  and  financial  statistics 
which  ordinarily  serve  as  a  basis  for  judgments 
concerning  the  fundamental  speculative,  busi- 
ness, and  banking  situation  —  for  instance,  sta- 
tistics of  wholesale  commodity  prices,  rates  on 
commercial  paper,  pig-iron  production,  and  bank 
clearings.  To  illustrate  the  kind  of  variations 
found  in  business  statistics  the  monthly  items  of 
two  of  the  series  just  named  —  average  wholesale 


(Pt, 


/ 


prices  and  rates  on  commercial  paper  —  are 
given  for  a  period  of  nearly  33  years  in  the  chart 
at  the  bottom  of  this  page  and  the  one  following.1 
The  curve  representing  wholesale  prices  shows 
the  average  wholesale  price  of  ten  commodities 
selected  because,  first,  they  are  unusually  sensi- 
tive to  price  changes  and  are  not  greatly  affected 
by  the  seasons  and  second,  they  are  of  a  varied 
nature  and  are  important  to  the  industrial  life  of 
the  country.2  The  curve  representing  rates  on 
commercial  paper  shows  the  rate  on  60-90  day 
commercial  paper  in  New  York.    These  series 

1  In  this  chart  the  logarithmic  or  ratio  scale  is  used.  Conse- 
quently, equal  percentage  changes  in  each  series  are  repre- 
sented by  equal  vertical  distances  and  the  differences  in  the 
violence  of  fluctuations  of  the  two  curves  corresponds  exactly 
to  the  differences  in  percentage  changes  from  minima  to 
maxima  in  the  two  series. 

§£■  *  The  commodities  are:  cottonseed  oil,  coke,  pig  iron,  bar 
iron,  pig  zinc,  mess  pork,  hides,  print  cloths,  sheetings,  and 
worsted  yarns.  The  prices  of  these  commodities  all  have 
similar  major  fluctuations. 


Money  Rates  and  Commodity  Prices,  1890-1905 
(Ratio  scale) 


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INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS      3 


reflect  very  clearly  variations  in  business  pros- 
perity, and  the  most  noticeable  feature  of  the 
curves  is  their  cyclical  movement.  They,  there- 
fore, are  well  adapted  for  use  in  an  index  designed 
to  show  fluctuations  in  general  business  condi- 
tions. 

A  second  noticeable  feature  of  the  chart  is  the 
correspondence  of  the  major  wave  movements  of 
the  two  curves.  Comparison  of  these  movements/ 
shows,  however,  that  the  crests  of  the  waves  fori 
interest  rates  appear  to  follow,  in  point  of  time, ' 
the  high  points  for  commodity  prices.  But  a 
decision  as  to  the  precise  relationship  between 
the  wave  movements,  or  cyclical  fluctuations,  of 
interest  rates  and  wholesale  prices  during  periods 
of  alternating  prosperity  and  depression  is  made 
difficult  by  three  disturbing  influences:  first,  a 
substantial  seasonal  movement  in  interest  rates' 
during  each  year,  by  which  the  rates  are  usually 
low  in  the  summer  and  high  in  the  autumn,  thus 
disguising  the  cyclical  movements;  second,  the 
effects  of  such  unusual  events  as  the  free  silver 
campaign  of  1896,  the  outbreak  of  war  with 
Spain  in  the  spring  of  1898,  the  declaration  of 
war  in  Europe  in  July  and  August  1914,  and  the 


great  inflation  of  prices  during  the  war;  and 
third,  the  diyeisei  trends  of  the  two  series  — 
downward  for  interest  rates  and  upward  for  com- 
modity prices  —  for  the  whole  period  covered. 

The  two  statistical  series  just  considered,  and 
many  other  series  connected  with  speculation 
and  security  prices,  business  activity  and  com- 
modity prices,  or  banking  and  interest  rates, 
reflect,  as  we  have  said,  cycles  of  business  prosper- 
ity and  depression,  and  therefore  constitute  the 
raw  material  for  the  construction  of  an  index  of 
general  business  conditions.  In  order  to  adapt 
such  raw  material  to  our  purpose  —  the  securing 
of  an  index  which  would  measure  and  forecast 
the  ebb  and  flow  of  business  —  two  statistical 
operations  had  to  be  performed: 

First,  methods  were  devised  for  eliminating 
the  seasonal  influences  and  long-time  move- 
ments from  the  various  statistical  series 
utilized;  and 

Second,  the  series  thus  corrected  were 
sorted  into  groups  according  to  the  times  at 
which  maximum  or  minimum  points  of  the 
cyclical  fluctuations  were  reached. 


Money  Rates  and  Commodity  Prices,  1906-22 
(Ratio  scale) 


J906       1907       I90S       1909       1910 


1911 


I9ia       1913       1914       1915       1916        1917       1916       1919       1920      I9£l      1922 


487369 


4  /.INTERPRETATION 'QF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS 


Chart  I.  —  Pig-Iron  Production:  Actual  Figures 
{Unit:  1,000  gross  tons) 


JOOO 

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1903         1904         1905         1906         1907        1908         1909         1910  1911  1912         1913  1914         1915 


1916 


Explanation:  The  above  chart  shows  the  monthly  production  of  pig  iron 
for  the  years  1903-16.  As  the  United  States,  throughout  this  period,  grew  in 
population  and  in  the  extent  of  its  commercial  activities,  new  iron  furnaces 
were  set  in  operation  and  there  was  a  gradual  expansion  in  the  total  output  of 
the  nation.    This  growth  element,  or  long-time  movement  upward,  in  the 


normal  producing  capacity  of  this  industry  has  been  represented  in  the 
chart  by  the  straight  line  fitted  to  the  original  items.  Correction  for  this  in- 
fluence was  accomplished  by  expressing  the  actual  tonnage  manufactured  in 
each  month  as  a  percentage  of  the  corresponding  "  normal"  production  in- 
dicated by  the  straight  line.  The  resulting  figures  appear  in  Chart  II  below 


MO 


Chart  II. — Pig-Iron  Production:  Figures  Corrected  for  Long -Time  Movement 

{Percentages) 


1903 


1904 


1905 


1906 


1907 


1908 


1909 


1910 


1912 


1913 


1914 


1915 


1916 


Explanation:  The  solid  line  on  the  above  chart  represents  pig-iron  pro- 
duction corrected  for  the  long-time  movement,  but  not  for  the  seasonal 
movement;  the  dotted  line  indicates  the  usual  seasonal  variation  in  the  out- 
put during  the  year.  Correction  for  the  seasonal  influence  was  made  by 
taking  the  differences  between  the  corresponding  items  of  these  two  lines; 


the  results  of  this  subtraction  show  in  each  case  by  how  much  the  actual 
production,  after  the  long-time  movement  had  been  eliminated,  exceeds  or 
falls  short  of  the  output  normally  to  be  expected  for  that  month.  These 
differences  (presented  in  Chart  III  below)  are  called  "the  corrected  figures" 
since  both  the  long-time  and  seasonal  movements  have  been  removed. 


+40 


Chart  III.  —  Pig-Iron  Production  :  Corrected  Figures 
{Percentages) 




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1903  1904  1905  1906  1907  1908  1909  1910  1911  1912  1913  1914  1915 


1916 


INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS 


Chart  IV.  —  Interest  Rates:   Actual  Figures 
( Unit:  one  per  cent  per  annum.) 


Explanation:  The  above  chart  shows  the  actual  rates  on  choice  double- 
name  60-00  day  commercial  paper  by  months  for  the  years  1003-16  During 
this  period  there  was  a  gradual  downward  trend  of  discount  rates,  as  shown 
by  the  straight  line  fitted  to  the  original  items.    Correction  for  this  influence 


was  accomplished,  as  in  the  case  of  pig  iron,  by  expressing  the  actual  rate  for 
any  month  as  a  percentage  of  the  corresponding  "normal"  rate  indicated  by 
the  straight  line.    The  resulting  figures  appear  in  Chart  V  below 


Chart  V.  —  Interest  Rates:   Figures  Corrected  for  Long-Time  Movement 

{Percentages) 


160 


140 


120 


100 


803  1904 


1906  1907 


©08  1909 


1912 


1913 


1914 


Explanation:  The  solid  line  on  the  above  chart  represents  the  rates  on  60- 
00  day  commercial  paper  corrected  for  the  long  time  movement,  but  not  for 
the  seasonal  movement;  the  dotted  line  indicates  the  seasonal  variation  in 
rates  through  the  year.  This  variation,  it  is  clear,  is  relatively  greater  than 
that  of  pig-iron  production  (Chart  II).  Correction  for  the  seasonal  influence 
was  made  by  taking  the  difference  between  the  corresponding  items  of  these 


two  lines.  The  results  of  this  subtraction  show  in  each  case  by  how  much 
the  actual  rate,  after  the  long-time  movement  had  been  eliminated,  exceeds 
or  falls  short  of  the  rate  normally  to  be  expected  for  that  month  of  the  year. 
These  differences  (presented  in  Chart  VT  below)  are  called  "the  corrected 
figures,"  since  both  the  long  time  and  seasonal  movements  have  been  re- 
moved from  them. 


Chart  VI.  —  Interest  Rates:  Corrected  Figures 
(Percentages) 


1-4O 


»20 


-20 


-40 


1906  1907  1903  I909  I9K) 


1914 


1913 


1916 


6      INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS 

Chart  VII.  —  Corrected  Figures  for  the  Series  of  the  Speculative  Group  (A),  1903-14 


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(A)  Group  average.  (2)   Average  price  of  industrial  stocks.  (4)   Average  price  of  railroad  bonds. 

(1)    Bank  clearings  of  New  York  City  (3)    Average  price  of  railroad  stocks. 


Chart  VIII.  —  Corrected  Figures  for  the  Series  of  the  Business  Group  (B),  1903-14 


(B)  Group  average. 

(5)  Bank  clearings  of  the  United  States  outside  New  York  City 

(6)  Bradstreet's  index  of  wholesale  commodity  prices. 


(7)  United  States  Bureau  of  Labor  Statistics'  index  of  wholesale  com- 
modity prices.  , 

(8)  Pig-iron  production. 


Chart  LX.  —  Corrected  Figures  of  the  Series  of  the  Banking  Group  (C),  1903-14 


1903 


1904' 


1905 


1906 


1907  1908 


1909 


1910 


1911 


1912 


191,3 


1914 


(C)  Group  average. 

(9)  Interest  rate  on  60-90  day  commercial  paper  in  New  York  City.  (n)  Loans  of  New  York  City  Clearing  House  banks  (reversed). 

(10)  Interest  rate  on  4-6  months  commercial  paper  in  New  York  City.  (12)  Deposits  of  New  York  City  Clearing  House  banks  (reversed). 


Chart  X.  — THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS,  1903-14 


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Group  averages  for:  (B)  Business:  wholesale  prices  of  commodities  and  volume  of  business. 

(A)  Speculation:  prices  of  securities  and  volume  of  stock  sales.  (C)  Banking:  Commercial  paper  rates  and  bank  loans  and  deposits. 


INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS      7 


Statistical  series,  thus  corrected  and  thus 
sorted,  reflect  accurately  the  cycles  of  specula- 
tion, business  and  banking,  and  constitute  the 
data  used  in  our  Index  of  General  Business 
Conditions. 

The  purpose  of  the  Index  of  General  Business 
Conditions  published  by  the  Harvard  Economic 
Service  is  to  provide,  first,  a  record  of  business 
cycles,  and  second,  a  basis  for  forecasting  busi- 
ness conditions.  A  full  explanation  of  the  data 
and  technical  methods  used  in  constructing  it  is 
given  in  Indices  of  General  Business  Conditions.1 
The  explanation  which  follows  is  intended  to 
serve  as  a  guide  in  interpreting  the  current  index. 

II.    THE  INDEX  CHARTS,  1903-14 
AND  1918-22 

The  precise  method  of  constructing  our  Index 
will  be  understood  by  referring  to  the  charts  on 
pages  4,  5  and  6. 

Charts  I  and  TV  present  the  actual  figures  for 
two  series  chosen  for  illustration  —  pig-iron 
production  and  interest  rates.  On  the  same 
charts  appear  two  straight  lines  which  represent 
the  long-time  movements  of  those  series. 

Charts  II  and  V  present  the  figures  of  the  two 
series  corrected  for  the  long-time  movements 
only.  The  usual  seasonal  movement  of  each 
series  is  shown  by  the  broken  line. 

Charts  III  and  VI  present  the  figures  corrected 
for  both  long-time  movements  and  seasonal 
influences.  It  is  evident  that  the  figures,  thus 
corrected,  reveal  the  cyclical  fluctuations  more 
clearly  than  do  the  crude  data. 

Charts  VII  to  LX  present  the  corrected  figures 
for  the  two  series  chosen  for  illustration,  and  ten 
others.  It  will  be  seen  that  the  twelve  series  are 
sorted  into  three  groups  —  group  A,  being  given 
in  Chart  VII,  group  B  in  Chart  VIII,  and  group 
C  in  Chart  LX  —  according  to  the  times  at  which 
maximum  and  minimum  points  of  the  series 
occur.  Group  A,  consisting  of  series  which  fluc- 
tuate first,  either  upward  or  downward,  are  all 
series  depending  upon  speculation;  group  B, 
consisting  of  series  in  which  the  fluctuations 
follow  or  lag  behind,  in  point  of  time,  the  fluc- 
tuations of  the  speculative  group,  all  have  to  do 

1  Published  in  book  form  by  the  Harvard  Economic  Serv- 
ice; reprinted  from  The  Review  of  Economic  Statistic^, 
January  and  April,  1919. 


with  business  and  industrial  activity;  group  C, 
consisting  of  series  whose  fluctuations  lag  behind 
those  of  the  business  group,  all  have  to  do  with 
banking  conditions  and  the  money  market.  The 
average  of  each  group  of  series  was  then  found, 
with  the  result  that  we  obtained  an  average  rep- 
resenting speculation,  an  average  representing 
business,  and  an  average  representing  banking, 
during  the  period  covered  by  the  charts.  In 
Chart  X  curves  are  shown  representing  these 
three  averages,  and  in  this  manner  an  Index  of 
General  Business  Conditions  was  obtained  for 
the  period  1903-14.  The  relationships  which 
obtained  between  the  three  curves  representing 
speculation,  business  and  banking,  during  the 
pre-war  period,  are  evident  from  the  chart,  the 
most  significant  for  the  purposes  of  forecasting 
being  the  order  in  time  of  the  major  movements. 
These  relationships  are  the  basis  for  our  inter- 
pretation of  the  current  Index  Chart,  which 
shows  the  conditions  that  have  existed  since  the 
armistice. 

For  the  period  1914-18  the  Great  War  and 
government  control  of  industry  dislocated  eco- 
nomic conditions  to  such  an  extent  that  the  nor- 
mal relations  between  speculation,  business,  and 
banking,  which  the  Index  shows  to  have  obtained 
in  time  of  peace,  no  longer  existed ;  the  chart  for 
the  war  period  is,  therefore,  not  presented.  The 
current  Index,  however,  for  the  period  since  the 
armistice  —  based  necessarily  on  somewhat  dif- 
ferent statistical  series  from  those  originally 
utilized  for  the  pre-war  period  —  shows  that  the 
normal  pre-war  sequences  between  speculation, 
business,  and  banking  have  been  resumed.  Fore- 
casts of  business  conditions  may,  therefore, 
safely  be  made  from  the  current  Index  of  General 
Business  Conditions,  on  the  basis  of  conclusions 
drawn  from  pre-war  relationships. 

When  the  task  of  constructing  the  Index  for 
the  period  1918-22  was  undertaken  it  was  found 
that  current  figures  for  the  statistical  series 
utilized  for  the  pre-war  period  were  not  all  avail- 
able and  suitable.  Consequently,  as  has  been 
said,  the  current  Index  is  based  upon  somewhat 
different  data  from  those  originally  utilized  for 
the  period  1903-14.  In  order  to  demonstrate 
graphically  the  essential  similarity  of  the  data 
underlying  the  current  Index  Chart  and  that  for 
1903-14,  we  have  reconstructed  the  chart  for  the 
earlier  period  using  the  identical  series  which 


8       INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS 


CHART  XI. —THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS,  1903-14 
(A)  Speculation        (B)  Business        (C)  Money 


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Explanation:  This  chart  is  based  upon  precisely  the  same  statistical  series 
as  those  used  in  the  current  Index,  given  on  the  opposite  page.  The  curves 
are  not  so  smooth  as  those  of  Chart  X  because,  first,  a  smaller  number  of 


enter  the  current  chart.  The  indices  thus  se- 
cured are  given  in  Chart  XI.  The  curves  of  this 
chart  show  minor  fluctuations  which  the  earlier 
chart  did  not  —  due  to  use  of  monthly  data 
instead  of  bi-monthly  and  fewer  series  —  but  the 
outstanding  movements  are  the  same. 

In  both  the  pre-war  and  post-war  periods  the 
major  movements  of  curve  A,  speculation,  pre- 
ceded and  hence  forecast  the  movements  of  curve 
B,  representing  business.  Likewise,  the  major 
movements  of  curve  B  preceded  and,  in  turn, 
forecast  those  of  curve  C,  representing  money. 

The  Index  Chart  shows  clearly  five  recurrent 
phases  in  the  business  cycle,  each  phase  occurring 
three  times  in  the  period  from  1903  to  1914.  The 
five  phases  are:  (1)  depression,  (2)  revival,  (3) 
business  prosperity,  (4)  financial  strain  and 
liquidation  of  securities,  and  (5)  industrial  crisis 
and  liquidation  of  commodities.  Each  phase 
develops  gradually  into  the  one  following,  but 
each,  nevertheless,  is  distinguished  by  charac- 
teristic movements  of  speculation,  of  business, 
and  of  money.  The  Index  Chart,  through  the 
movements  of  the  three  curves,  reveals  the  phase 
of  the  business  cycles  existing  at  any  time  and, 
properly  interpreted,  forecasts  the  phase  in 
prospect. 

III.    INTERPRETATION  OF  THE 
INDEX 

Various  generalizations  have  been  made  by 
students  of  business  fluctuations  as  to  the  length 


series  was  averaged  in  each  group  and,  second,  the  items  are  monthly  in- 
stead of  bimonthly. 


and  regularity  of  the  interval  between  economic 
crises  or  between  business  depressions.  The 
generalization  which  has  received  the  widest 
currency  is  that  crises  occur  at  10-year  intervals. 
The  proponents  of  the  10-year  theory  cite,  in 
support  of  their  case,  the  crises  of  1837,  1847, 
1857,  and,  after  the  Civil  War  in  the  United 
States,  those  of  1873,  1884,  1893,  and  1903. 
Another  generalization  is  that  crises,  especially 
those  of  the  last  25  or  30  years,  have  occurred 
regularly  at  7-year  intervals;  thus,  it  is  pointed 
out,  crises  came  in  Europe  in  1893,  1900,  1907, 
1914,  and  1921.  It  will  be  observed  that,  com- 
paring the  dates  given  in  support  of  these  two 
theories,  there  is  obviously  a  conflict  in  the  evi- 
dence offered.  Although  it  is  clear  that  there  are 
business  cycles  with  recurrent  phases  of  pros- 
perity and  depression,  it  has  not  been  proved  that 
such  cycles  are  of  uniform  duration. 

One  of  the  most  striking  and  significant  things 
brought  out  by  our  Index  Chart  for  1903-14  is 
the  relatively  short  interval  from  prosperity  to 
prosperity,  or  depression  to  depression.  Basing 
our  calculations  on  curve  B,  representing  busi- 
ness, we  find  an  interval  of  somewhat  less  than 
four  years  from  the  trough  of  the  depression  of 
1904  to  the  trough  of  the  succeeding  depression 
of  1908,  and  intervals  between  the  depressions 
of  1908,  191 1,  and  1 9 14  of  about  three  years 
each. 

Evidence  concerning  the  frequency  of  business 
depressions,  consistent  with  that  of  the  Index 


INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS      9 


Chart  XII.  —  The  Current  Index,  1918-22 


1914-18 : 
PRCE  ^ 

REVOLUTION 

PREVIOUS        *1 
RELATIONS 

AND  O 

SIGNIFICANCE 
OT  SERES       _ 
DESTROYED 


1918-22: 

3EQUENCE 

OF 

FLUCTUATIONS 

RESTORED 


1919  1920  1921  1922 


Chart,  is  offered  by  the  course  of  commodity 
prices  and  interest  rates  since  1890,  shown  in  the 
chart  on  pages  2  and  3.  The  intervals  between 
successive  troughs  of  the  wave  in  the  curve  for 
commodity  prices  from  1892  to  1914  are,  in 
months:  34,  26,  44,  44,  43,  43,  and  36.  The  in- 
tervals between  the  troughs  in  interest  rates  are 
harder  to  determine,  because  of  the  substantial 
seasonal  influence,  but  the  chart  shows  that 
periods  of  cheap  money  occurred  in  1892,  1894- 
95,  1898,  1900-01,  1904,  1908-09,  191 1,  and 
1914-15.  The  evidence  of  both  of  these  impor- 
tant statistical  series,  and  that  of  the  Index  Chart, 
supports  the  conclusion  that  for  the  twenty-five 
years  preceding  the  war,  periods  of  business  de- 
pression occurred  at  intervals  of  approximately 
3  or  4  years,  with  one  interval  as  short  as  26 
months.1  In  other  words,  business  cycles  are  of 
comparatively  short  duration.  Further,  the 
lengths  of  complete  cycles  in  the  past,  26  to  44 
months,  have  not  been  uniform  enough  to  war- 
rant predicting  the  time  at  which  a  given  phase 
of  the  business  cycle  will  develop,  if  that  predic- 
tion must  be  based  upon  the  assumption  of  a  con- 
stunt  interval  between  crises,  or  between  periods  of 


1  In  the  post-armistice  period  it  happens  that  the  interval, 
shown  by  curve  B  of  our  Index  Chart,  between  the  trough  of 
the  short-lived  depression  of  1919  and  the  depression  of  19  21 
(February  1919-May  192 1)  is  28  months. 


depression.  The  established  sequences  of  move- 
ments of  speculation,  business  and  money,  how- 
ever, afford  a  method  of  solving  this  problem. 

The  forecasts  of  the  Harvard  Economic  Service 
are  not  based  upon  the  assumption  that  the  com- 
plete business  cycle  is  of  invariable  length.  Nor 
are  they  based  upon  the  distances  from  the  base 
line  of  the  three  curves  of  the  Index  Chart, 
representing  speculation,  business,  and  money. 
Rather,  the  forecasts  are  based  upon  the  relations 
which  exist  among  those  curves  during  any  given 
phase  of  the  business  cycle  and  the  magnitude  of 
the  movement  from  crest  to  trough  of  each 
curve. 

In  interpreting  the  Index  Chart  the  points  of 
primary  significance  to  consider  are: 

First,  the  direction  of  movement  of  each 
curve  considered  in  connection  with  the 
direction  of  movement  of  the  other  curves; 

Second,  the  direction  of  the  immediately 
preceding  movements;  and 

Third,  the  magnitude  of  such  movements. 

These  are  the  primary  points  to  consider  in 
forecasting  because  they  indicate  the  phase  of 
the  business  cycle  which  is  immediately  in 
prospect. 

As  an  illustration  of  the  method  of  interpret- 
ing the  Index  Chart  let  us  consider  the  situation 
which  it  revealed  in  the  second  half  of  1921. 
Curve  A,  representing  speculation,  was  moving 
upward  from  the  low  point  of  July.  This  upward 
movement  was  significant  for  three  reasons. 
First,  it  was  a  reversal  in  direction  after  the  long- 
continued  decline  which  had  been  in  progress 
since  November  1919.  Second,  it  was  accom- 
panied by  a  sharp  decline  in  curve  C,  represent- 
ing money  rates.  Third,  the  business  curve, 
though  moving  somewhat  irregularly,  showed 
tEat  the  volume  of  business  and  commodity 
prices  had  ceased  the  drastic  decline  which  had 
been  in  progress  from  April  1920  toMay  1021 . 
The  forecasts  to  be  drawn  from  this  combination 
of  circumstances  were,  first,  that  the  upward 
movement  of  STjecuialioii,.  being  accompanied  by 
declining  money  rates,  was  the  beginningof  a 


tf 


% 


substantial  and  persistent  rise,  and  second,  that 
thg_jjse_in  sr^culationwould  be  followed  after 
an  interval^  by  a  substantial  improvemenFln" 
busm^s,  represented  by  curve  B. 


io    INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS 


It  was  possible  to  forecast  the  approximate 
time  at  which  the  "substantial  improvement  in 
business"  might  be  expected  by  means  of  the 
relationship  between  curves  C  and  B,  represent- 
ing money  and  business,  respectively.  The  re- 
lationship of  the  curves  of  our  Index  Chart  in 
the  second  half  of  192 1  was  closely  similar  to  that 
in  the  summer  of  1904,  in  the  spring  of  1908,  and 
in  the  winter  of  1910-11.  The  improvement  in 
business  following  these  dates  took  place  ten  to 
twelve  months  after  the  beginning  of  a  marked 
decline  in  interest  rates.  Such  a  decline  was  the 
most  noteworthy  development  of  the  last  eight 
months  of  192 1.  It  was  not  until  May  of  that 
year  that  the  decline  in  interest  rates,  and  hence 
in  curve  C,  reached  large  and,  hence,  significant 
proportions.  The  highest  rate  had  been  reached 
in  October  1920,  when  60-90  day  paper  was 
quoted  at  8  per  cent.  In  the  months  following 
the  rate  fell  slowly  until  a  figure  of  7^-7!  per  cent 
was  reached  in  the  middle  of  April.  Thereafter 
the  decline  was  very  rapid,  and  at  the  end  of  the 
year  the  prevailing  rate  was  5  per  cent.  In  pre- 
vious business  cycles —  1904,  1908,  and  1910-n 
—  a  sharp  decline  in  curve  C  began,  as  has  been 
said,  some  ten  to  twelve  months  previous  to  a 
substantial  rise  in  curve  B.  On  the  basis  of  the 
experience  of  former  business  cycles,  therefore,  a 
substantial  improvement  in  business  activity 
and  commodity  was  forecast  to  begin  ten  to 
twelve  months  after  April  192 1,  or  from  Febru- 
ary to  April  1922.  It  will  be  noticed  that  the 
forecast  of  the  probable  time  of  substantial  im- 
provement of  business  was  based,  not  on  the 
assumption  that  the  duration  of  the  business 
cycle  is  three  years  or  any  other  fixed  period,  but 
upon  the  time  relationship  existing  among  the 
curves  of  the  Index  Chart. 

Not  only  do  the  speculative  and  money  curves 
of  the  Index  Chart  forecast  general  business  con- 
ditions, but  the  movements  of  the  money  curve 
forecast  major  movements  in  speculation.  Thus, 
during  the  period  1903-14  the  culmination  of  an 
upward  movement  and  the  beginning  of  a  down- 
ward movement  of  speculation,  curve  A,  were 
invariably  signaled  by  a  sharp  advance  of  money 
rates,  curve  C;  previous  to  such  a  signal  rates 
had  remained  low  in  eachjnstance  —  1904-05, 
1908-09,  and  191 1  —  for  about  a  year.  A  sharp 
rise  in  curve  C,  resulting  from  an  increase  in 
actual  rates  on  commercial  paper  of  about  i§ 


per  cent  during  a  period  of  six  months  or  less, 
occurred  in  September-December  1905,  August- 
November  1909,  and  March-October  191 2. 
During  the  pre-war  period,  therefore,  each  rise 
preceded  and  hence  gave  warning  of  pronounced 
liquidation  in  security  markets. 

In  19 19  the  federal  reserve  system  was  in 
operation  and  rediscount  rates  were  kept  low  in 
response  to  United  States  Treasury  requirements. 
For  this  reason  rates  on  commercial  paper  did 
not  reflect  money  market  conditions  previous  to 
November  1919,  when  rediscount  rates  were  first 
increased.  Our  current  Index  Chart  shows  that, 
contrary  to  precedents  of  the  pre-war  period,  a 
sharp  rise  in  money  rates  did  not  precede  the 
inauguration  of  the  bear  market  of  1919-20.  It 
will  be  noticed,  however,  that  such  a  rise  took 
place  concurrently  with  the  decline  in  speculation, 
curve  A. 

Long  continued  and  substantial  advances  in 
speculation,  both  in  the  pre-war  and  post-war 
periods,  were  signaled  by  a  sharp  decline  in 
money  rates  followed  by  about  a  year  of  easy 
money.  In  one  instance,  1911-12,  however,  dur- 
ing the  period  covered,  the  advance  in  specula- 
tion was  relatively  small. 

W.    SUPPLEMENTARY  DATA 

Although  it  is  possible  by  proper  interpreta- 
tion of  the  Index  of  General  Business  Conditions 
alone  to  judge  the  existing  business  situation  and 
forecast  probable  developments,  that  Index  does 
not  present  a  complete,  detailed  picture  of 
finance,  trade,  and  industry.  Thus,  curve  B  of 
the  Index  Chart,  representing  business,  is  based 
upon  statistical  series  which  reflect  commodity 
prices  and  the  monetary  volume  of  business.  In 
order  to  supplement  the  Index  of  General  Busi- 
ness Conditions  another  index  has  been  com- 
puted which  is  based  upon  the  physical  quanti- 
ties of  goods  manufactured. 

The  Index  of  the  Volume  of  Manufacture, 
given  in  Chart  XIII,  shows  the  fluctuations  in 
the  quantity  of  goods  produced  by  seven  leading 
groups  of  manufacturing  industries  —  iron  and 
steel,  lumber,  paper,  textiles,  leather,  food,  and 
tobacco  —  monthly  since  January  1919.  Ade- 
quate data  f  or^the  construction  of  a  similar  index 
for  the  pre-war  period  are  not  available. 

This    Index    registers    definitely    the    cycle 


INTERPRETATION  OF  THE  INDEX  OF  GENERAL  BUSINESS  CONDITIONS     n 


through  which  manufacturing  activity  has 
recently  passed  in  the  United  States.  It  dis- 
closes that  a  continuous  and  rapid  [decline  in 
output  began  in  April  1920,  when  curve  B  of 
Chart  XII  also  inaugurated  a  similar  decline. 


In  addition  to  the  data  bearing  upon  the 
volume  of  manufacture  other  data  are  presented 
in  the  Harvard  Economic  Service  which  throw 
light  upon,  and  hence  aid  in  interpreting,  the 
movements JJof  the  three  curves  of  the  Index 


Chart  XIII.  —  Adjusted  Index  of  the  Volume  of  Manufacture 
(Normal  =  100) 


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100 
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85 

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N 

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73 

70 

^BHBQu&n 

tify  of  goocte  produced 
er  of  workers  employed 

1 

23436789 

1919 


10   II    12     I     2    3    4 


3    6    7    8    9    10  II    12    I 
1920 


23456769    10   II   12     IS 

I9£l  1922 


Explanation:  The  index  of  the  quantity  of  goods  produced  is  based  upon 
the  physical  output  of  seven  large  industrial  groups —  iron  and  steel,  lumber, 
paper  and  printing,  textiles,  leather,  food,  and  tobacco  —  and  the  index  of 
employment  is  based  upon  the  number  of  workers  on  the  pay  rolls  of  seven 
industrial  groups  —  manufacturing  machinery  and  conveyances,  auto- 
mobiles, railroad  cars,  wood  products,  printing  and  paper  goods,  clothing 
and  millinery,  and  boots  and  shoes.  In  constructing  this  index,  both  long- 
time tendencies  and  seasonal  variations  have  been  carefully  estimated  and 


eliminated  so  that  the  fluctuations  of  production  and  employment,  re- 
flected by  the  movements  of  the  two  curves  recorded  on  the  above  chart, 
are  free,  first,  from  seasonal  influences  to  which  practically  all  lines  of  busi- 
ness are  subject  and  second,  from  the  long-time  movement  which  is  usually 
the  result  of  an  increasing  population  and  industrial  development.  Each 
figure  is  adjusted  for  seasonal  influence  and  expressed  as  a  percentage  of 
normal.  "Normal"  is  statistically  determined  on  the  basis  of  experience, 
good  and  bad  years,  and  long-time  tendencies  being  considered. 


The  rate  of  decline  in  output  greatly  lessened 
after  the  end  of  the  year,  but  a  slow  irregular 
decline  continued  so  that  the  minimum  was 
reached  in  July  192 1.  Since  that  month  the 
recovery  has  been  substantial. 

The  relative  movements  since  the  middle  of 
192 1  of  the  Index  of  the  Volume  of  Manufacture 
and  curve  B  of  the  Index  Chart  are  significant. 
While  manufacturing  output  rose  substantially 
curve  B,  dependent  upon  prices,  registered  a 
comparatively  moderate  upward  trend  during 
the  same  period.  In  the  recent  business  depres- 
sion, therefore,  a  substantial  increase  in  the  phys- 
ical volume  of  manufacture  preceded,  and  prob- 
ably forecast,  an  increase  in  commodity  prices. 


Chart.  Such  data  include:  indices  of  industrial 
employment;  prices  of  leading  commodities, 
their  purchasing  power,  and  their  interrelations; 
indices  of  prices  of  various  classes  of  securities; 
the  value  and  quantity  of  foreign  trade;  the 
international  balance  of  payments;  the  produc- 
tion and  prices  of  agricultural  products;  the 
volume  of  security  issues;  and  financial  and 
economic  statistics  of  leading  European  coun- 
tries. We  shall  also  add  to  these  features  an 
Index  of  British  Economic  Conditions,  which 
has  been  constructed  by  distinguished  English 
statisticians  along  lines  similar  to  those  followed 
in  the  construction  of  our  own  Index. 


mi 


COPYRIGHT,    1922,   BY  HARVARD  UNIVERSITY 


PRINTED  AT  THE   HARVARD  UNIVERSITY  PRESS 
CAMBRIDGE,  MASS.,   U.  S.  A. 


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